Privatisation of Ethiopia’s State Enterprises to Maximum Benefits

The EPRDF government has announced partial privatisation of state enterprises. Transferring enterprises in strategic parts of the economy will have positive effects on the competitiveness of the economy and the privatised firms. This can only be achieved if the privatisation process is transparent and inclusive, writes Addisu A. Lashitew (PhD) (lashitew@rsm.nl), a researcher at Simon Fraser University in Vancouver, Canada.

The unprecedented move by the government to privatise nearly all major public enterprises has caught many by surprise. Even those who have been advocating for the cause were left bewildered by the far-reaching nature of the proposed privatisation measures.

With the exception of financial institutions, the plan involves partially privatising nearly all major public enterprises including the national airliner, the telecommunications corporation, the national electric power corporation, the railway and shipping lines corporations and a range of industrial plants that are under establishment.

While the government will continue to hold the majority shares in the major state corporations, the industrial establishments are open to full private ownership by foreign or domestic investors.

The process of privatising corporations that were under the auspices of the formerly socialist state has been going on for the past three decades in Ethiopia. But the process has been so slow that as many as one-third of the enterprises that were meant to be transferred to domestic and private actors are still under government ownership.

This studied approach of privatisation has drawn praises from the likes of the World Bank for its prudence. In countries such as Russia, rushed privatisation processes had led to significant wastage of public resources as corrupt officials colluded with emerging entrepreneurs to grab entire industries at a significantly undervalued price. Non-transparent and corrupt privatisation procedures have led to the loss of substantial public wealth in countries such as Madagascar.

Radical, ideologically-driven privatisation schemes have also led to counterproductive outcomes that involved the transfer of public service providers such as water utilities into private hands.

Public ownership is motivated by the need to address the limitations of private ownership and create positive externalities that are beneficial to societal welfare. For instance, a state might take ownership of a strategic enterprise with the aim of protecting and nurturing infant industries that would otherwise face difficulty to compete on their own. An example of this is Ethiopian Airlines, which thrived under strong government support in the form of protection from competitors, and loan guarantees.

Alternatively, privatisation can be motivated by the need to extend public services that are less likely to be provided affordably by profit-driven private actors. State ownership in Ethiopia’s telecom, electric power generation, shipping, and the rail sector is motivated by the need to provide accessible and affordable telecom, electric power and transportation services to citizens.

In spite of these advantages, however, state ownership can also derail economic and social progress. Public enterprises will become more bureaucratic and less efficient since they are not disciplined by competitive market forces. In contrast, they can become spoiled by the government, which often buys their products, provides their finance and even assigns their management and board members. Having the same agent as an owner, financier, buyer and manager leaves public enterprises devoid of independent oversight, exposing them to agency problems that foster lethargy, inefficiency, and corruption.

The absence of external pressure for excellence also means that bureaucrats will settle for average outcomes. A great example of this is Ethio telecom, which has been decently successful in expanding mobile access but remains notorious for its poor customer service, much less pioneering transformative social innovations such as mobile banking. Likewise, the electric corporation has been generally successful in extending access to electricity but has failed to reduce its poor and erratic power distribution.

Given these considerations, the government’s move to partially privatise most public enterprises is understandable. Through partial ownership, the government can steer these enterprises towards advancing public welfare, such as universal electrification and mobile access. The presence of private ownership will introduce market pressure that will create an impetus for innovation and growth.

Partial ownership by global technology leaders can also improve innovativeness and market responsiveness. Imagine what it would be like to have a telecom firm that creates business-friendly internet bundles, cares about its customers and makes significant efforts to build its reputation.

Likewise, partial private ownership of the electric power corporation could eliminate power interruptions that have a debilitating effect on all business but especially those engaged in power intensive sectors. These moves will go a long way towards removing the annoying bottlenecks that citizens and businesses encounter, while at the same time increasing the country’s openness and competitiveness in the global market for resources such as capital.

To fully exploit the benefits of privatisation, however, the process will have to be transparent and carefully managed. For instance, a clear case for privatisation needs to be made for each enterprise rather than making a political decision to privatise every public-owned business entity.

Ethiopian Airlines appears to be doing very well, and it is not clear why it should be privatised. The company has a very ambitious expansion plan which has made it the largest African airliner while also being one of the most profitable. Privatising such a successful enterprise rather than strengthening its management and governance structures sounds like fixing something that is not broken, and in fact, works fabulously.

The authorities also need to ensure that the process does not end up enriching the wealthy without bringing in new management or technological expertise. It is worthwhile to recall Russia’s transitioning experience, which led to the creation of billionaire oligarchs overnight, with adverse politico-economic consequences that last to this day.

In addition to exacerbating inequalities, this kind of mistake will erode public confidence and undermine political support for the process. The government should strengthen the relevant regulatory agencies to ensure oversight and create an open and competitive environment, especially in sectors that were previously occupied by state monopolies.

The transfer of ownership should likewise focus not only on attracting capital and technology but also creating a sense of collective ownership. This is especially the case for Ethio telecom, whose monopoly position gives it an advantage of network externalities, thus enabling it to stay dominant and generate abnormal financial returns.

It is important to ensure that the public rather than individual investors alone benefits from the wealth generated by this large corporation. While the Prime Minister’s proposal to sell about five percent of the shares to individuals of Ethiopian origins is encouraging, this number might not be revised upwards in order to succeed in creating a genuine sense of ownership.

The privatisation of Safaricom, Kenya’s largest telecom firm, provides an excellent example of a successful and balanced approach to privatisation. At its formation, the government of Kenya owned 60pc of Safaricom, and the remaining 40pc was owned by Vodafone, a major British telecom operator. Benefiting from the policy support of the government and the technological expertise of Vodafone, Safaricom thrived as a highly customer-oriented and innovative company.

A decade ago, the government sold off a quarter of its stake in Safaricom through a transparent and competitive public offering at the Nairobi Stock Exchange. This privatisation scheme enabled well over half a million individual Kenyans to own stakes in their country’s largest corporation.

Today, Safaricom is the largest stock-listed company in East Africa and runs a purpose-driven business model that successfully blends commercial profit with the social purpose of empowering Kenyans. This example shows that privatisation can be carefully designed in a manner that balances between strategic public ownership, mass ownership, and access to advanced foreign technology. Ethiopian officials should seek to learn from and replicate this successful case of privatisation.